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| Subject: Re: Hong Kong System | |
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Author: Their customer became their partner |
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Date Posted: 06:28:35 02/01/03 Sat In reply to: 1997 Full Year Reviewowns the intellectual property 's message, "Re: clearing system known as APTOS" on 06:14:18 02/01/03 Sat ERG Group Transit/Smart Card Technology For subscribers who have been with us for two years or more will be familiar with the ERG Group. When we first recommended this great penny stock it was in the process of working out the little gremlins that you normally find in new technology performance. After a waiting period for this to conclude subscribers had a wonderful opportunity to get set with ERG shares at undervalued prices. Most of you had an entry price of about A$0.41and in the space of 15 months followers sold their holdings in the range of $4.35 - $4.40. We had recommended selling when the share price touched $4.30, and its’ share price reached a high of $4.50. For old and new subscribers, it is now time to buy ERG shares once again. For our new subscribers the following is a thorough report on ERG. Please study it first, then definitely get set, for we are expecting a score of exciting contracts to go ERG’s way later this year, and into the year 2002.. ERG Transit Systems offers leading edge Automated Fare Collection (AFC) systems to the global transit market and has established itself as a world leader in its field. The Company's scope of expertise in AFC includes design, development, manufacture, supply, installation, commissioning, maintenance and total outsourcing services. The Company has developed a central computer processing system that is capable of managing a smart card database, financial reconciliation and management data for both transit and other card applications, which remains the most advanced software of its kind in the world today. ERG Transit Systems has extensive experience in AFC from single mode, magnetic stripe based systems to fully integrated smart card systems. A truly global business, the Company's systems handle more than 25 million transactions per day or over 9 billion annually, in 200 cities around the world. ERG Transit Systems developed the world's largest integrated contactless smart card fare collection system in Hong Kong, known as Octopus, for Creative Star Limited. More than 6.6 million cards are in active use in Hong Kong, which has a population of approximately 6.8 million people. The system is able to handle up to 10 million transactions per day across all modes of public transport, including light and heavy rail, underground rail, buses and ferries. The scope of the system is being expanded into non-transit applications such as pay telephones, photography booths, 350 7-Eleven stores, parking garages and vending machines. The Hong Kong System is recognized internationally as one of the most advanced smart card systems in the world, having won the 1998 Sesames Award for Best Smart Card Application at Cartes 98 in Paris. In May 2000, ERG won the Business Asia 2000 Award for the Best Use of Australian Technology in Asia, which recognizes excellence and outstanding achievement in business, trade and investment between Australia and Asia. ERG Transit Systems (through the ERG managed OneLink Consortium) has also developed, and is operating, the world's first totally outsourced multi-model ticketing system in Melbourne, Australia, known as the Met. The project is the role model for an increasing number of transit operators looking to outsource their fare collection activities. The system utilizes both magnetic stripe and contactless smart card technologies across bus, tram and rail. ERG Group has ownership in a number of joint venture companies in Australia, Germany, Italy, Malaysia and the United Kingdom which have been established to provide card issuance, processing, reporting and management functions to organizations operating transit and non-transit related smart card schemes. Motorola and ERG had formed a smart card marketing alliance to pursue global opportunities in transit and certain multi-application smart card system technologies, which attracted much attention worldwide. In 1999, the ERG Motorola Alliance won major smart card based fare collection contracts in Rome, San Francisco and Singapore and contracts to conduct trials in Berlin and the Netherlands. Over 31,000 passengers participated in the Berlin trial, which successfully met the customer's requirements. In late 2000 Motorola felt it important to cut their involvement and concentrate on issues at home in the U.S. ERG Transit Systems is able to provide a total turnkey solution for transit operators' fare collection requirements. By working with the transit operators, the Company aims to assist them in lowering operating costs and improving revenue. The ERG Stored Value Card (SVC) is a plastic smart card containing a microprocessor that can store monetary value and information. It is the same size as a credit card and uses the chip for secure memory storage. The card is a new and convenient way to carry cash. The balance of cash on the card is adjusted each time the card is used. The SVC is reusable and can have value added to it at outlets throughout the network. The SVC is not a credit or charge card. It is an alternative to cash, and is intended to be used for smaller value purchases. ERG Card Systems (Aust) Ltd utilizes contact smart cards to provide a secure, cost effective migration path from the magnetic stripe (contact) technology underpinning existing global financial transaction systems. With numerous new contracts having been tendered, and soon to be decided, we expect ERG to be very successful as they are the world leader. Of these is the Sydney and Brisbane contracts. Sydney’s is estimated to be worth $100m initially and a great deal more over the 10 year contract. Brisbane is also estimated to be between $70m-$100m. ERG has a very interesting background, and one, which would benefit many new businesses starting out today. ERG was created almost by accident in 1987. Prior to that the Company had been a mid-1980s technology float, with no real business and what proved to be questionable technology. For our followers I have produced a background of ERG’s, because it is impressive and touches the very core of the Australian business spirit to succeed. I didn’t say anything about the spirit of the Australian investor. The two don’t mix too well as the business spirit is a fighting one and the investor is a greedy one and often doesn’t know when it is on a good thing. I suggest you read this and you will begin to understand what it is that we look for when we select a penny stock to follow and present you as an investor. In 1986 ERG began cleaning up the mess of their past management and developed a new business effectively from scratch. First task was to build a small management team, which would provide the core skills needed. By mid-1987 ERG comprised about ten employees and had little revenue. In that year they acquired a small Perth-based business, Associated Electronic Services (AES), which manufactured fare collection products and was "playing with" smart card technology. They immediately identified that they could not sustain the business by manufacturing product and supplying it to the Australian market. There were too few customers and contracting was inconsistent. Internationally there were only a few competitors in the industry and, more importantly, they identified that the market was changing. In 1987 the AES business had revenue of $1 million and lost nearly $2 million. ERG was capitalized at approximately $10 million. By June 2000, ERG had grown to revenue of $415.7 million, net profit after tax of $35.2 million and had over 1,000 employees. It was capitalized at $2.8 billion. The Group invested $58.4 million in R&D in 2000 alone, taking total R&D expenditure over the last ten years to $256 million. September 2000, they sold their telecommunications and fare collection manufacturing businesses to focus on system solutions for smart card technology (consisting of development, supply and operations). In the space of 13 years they have metamorphosized from a small ticketing hardware manufacturer to a global business with: 18 offices in 12 countries over 4 continents; Sales to more than 350 customers in 200 cities globally; 9.2 billion transactions per annum occurring on systems installed around the world; An increasing percentage of recurring or annuity type revenue; Alliances with major organizations worldwide; The dominant position in providing integrated transit smart card solutions globally; An annual budget of over $50 million for R&D; Approximately 40% of revenue derived from outside Australia; A ten-year compound growth rate of over 40%; and Over 28,000 shareholders worldwide. An innovative company needs strong leadership and a Board and management team that are not risk averse. Risk can be minimized but not removed entirely when the true potential of the business relies upon using and developing new technology and then pushing that technology to the limit - all too frequently in limited timeframes. ERG certainly possessed that. To reduce risk they’ve always sought to restrict their R&D to real projects, thereby avoiding conceptual R&D that might create a better mousetrap but not have any customers. Moving from a manufacturing company to a systems solutions business has been a significant transformation. Not all of their employees or management have been able to make the adjustment. This has necessitated constant restructuring and reinventing of the Company as a whole and of their people. Many employees who were valuable to the organization have changed their role and become better contributors. Above all else, employees must believe in the organization, its leadership, vision and the contribution they can make. Their staff turnover has been relatively low and all employees feel they have contributed to and shared in the Group's success. ERG has had the view that employees should be stakeholders, not just employees. To motivate their team they introduced a far-reaching employee share plan, despite minimal government support for such programs at the time. The shares have restrictions that tie the employee to the Company, and through regular allocations, extend their commitment period. The employee share plan has been fundamental to ERG’s success. Many of ERG employees have seen their shares increase in value significantly and in turn all shareholders have been rewarded. It is for this reason that ERG believes the current Australian Stock Exchange restrictions on the percentage of shares, which can be issued to employees, are counter-productive and should be reviewed. In 1990/91 ERG formed the opinion that their staff, including senior management, lacked some of the skills (particularly languages) necessary to succeed as a global business. Part of our plan at that time was to acquire multilingual staff through acquisition and/or alliances so that they could pursue their global objectives with the right personnel. ERG also believed that an acquisition should ideally deliver an existing customer base. The selection of Board members has also been an important part of ERG’s growth. The business has been marketing driven and a more conservative board may have restricted their ability to expand. They sought to recruit Directors that had broad-based business skills, international business experience, understood compliance and reporting requirements, and, whilst not being reckless, were not risk averse. We also considered it important for some Directors to be based outside the head office in Western Australia to remove the risk of being localized and too narrow in their focus. Simply making the decision to "go global" does not result in a successful innovative global enterprise. In 1989 ERG had already made the decision to expand offshore. They had offices in Stockholm and Toronto and had won contracts in both locations. However, they were far from being a global enterprise. Their overseas offices were sales offices and had no clear strategy to develop a truly global business. That situation changed in 1991. They’d developed their own Magna Carta, and it has continued to provide the base that has driven their growth. They set themselves more than 25 key goals to achieve over the ensuing five years. One of those goals was to be a $50 million revenue company by 1995 - they achieved $134.8 million. They set target growth rates and R&D spend levels, and identified how they could become the dominant company in their industry sector. This meant developing a coordinated global approach and expanding through acquisition and creation of strategic alliances. They also identified the importance of their customer base and the need to treat customers as partners. That approach had at times proved altruistic, but nevertheless their willingness to provide what the customer wants has been one of the key reasons for their success. Since 1991 they’ve largely worked to the key principles in the business plan. However, it has become increasingly necessary to reinvent itself and their global strategy as customer needs changed, competitors emerged or disappeared and technology underwent fundamental changes. Some of the changes that occured in the industry were driven by management as they identified new customer requirements. The trend to privatization of public transport and outsourcing fundamentally changed the face of their business. Many of their competitors remained focused on equipment supply only, whilst they moved more and more towards software and systems solutions. They identified the need to become a one-stop-shop for customers and found they could not rely on large multinationals to meet their subcontractor obligations. This led ERG to create their own software development capability and they now have over 400 software engineers across the Group. As the Company grew it also became increasingly challenging to communicate their vision internally and operate as one global organization. Consistency of branding, cultural hurdles, distance and coordination of development became new issues for an organization that was run and operated from Perth, Western Australia - the most remote head office on earth. Fortunately they had created successful alliances with global enterprises such as Nokia, which had been there and done it before them. ERG gained much experience through such alliances. Communication of a company's vision is one of the most difficult issues in building a business. Certain aspects of vision and strategy cannot be communicated in order to protect IP and know-how and to avoid informing your competitors. Equally, full disclosure of a vision to analysts and the investment community is likely to result in being labeled a dreamer or fool (or possibly both). However, it is fundamental that the Board and senior management support the company's vision. Over the past five years they’ve found communication and knowledge management an increasingly challenging issue to the extent that they have recently employed a team to manage this activity across the Group. During that period they’ve continued to reinvent their objectives and strategies at varying frequencies. The concept of sticking rigidly to a five-year plan is unworkable in running a global enterprise today. A five-year plan can operate as a guide but must not be used as an excuse not to change strategy. If an organization is to succeed globally it must be marketing driven and the market is never constant, particularly where technology is concerned. ERG has had a tremendous value of the customer and says, “it is very often the customer that can best influence and shape a company's strategy. If you don't address their requirements you don't have a business. Change of ownership and new strategies by competitors are also relevant.” ERG Group prides itself on the number and quality of alliances it has established with major multinational companies. The first two alliances we established were with global giants Philips and Nokia in 1991 and 1992 respectively. Since then they have established alliances with over 18 companies, including American Express, ANZ, Banksys (comprising all the Belgian banks), Cable & Wireless Optus, FirstGroup, Fujitsu, Interpay (the Dutch banks), Mayne Nickless, Motorola, National Express Group, Sema Group, Stagecoach, Sun Microsystems, Telstra, Unisys and Visa International. Each alliance has added value to ERG and helped them achieve their goals. Some, such as the Nokia alliance, had a profound effect on the Group's development. Nokia was an excellent role model as well as providing ERG with the experience necessary to build a world-class manufacturing facility. Additionally, as Nokia is based in Finland, it had many of the same issues to confront as ERG did, such as a small population, limited home market and a shortage of skilled employees. When they first met Nokia in 1990 it had revenue in its telecommunications division of A$660 million. Today, only 11 years later, Nokia's revenue is over A$53 billion. ERG is heading on the same path. The fundamental benefit of all our alliances is that they have allowed a relatively small company, as ERG is in global terms, to gain more rapid acceptance and market penetration than they otherwise would have. A number of alliances have served their purpose and they have moved on. Others are only just beginning and several more are currently being negotiated. The alliances have worked best where there is a win-win for both parties. However, achieving that position is easier said than done. Acquisitions have played an important role in building a global enterprise. The acquisition of the Prodata fare collection business in Belgium in 1992 provided ERG with multilingual staff, skills in technology ERG did not have and a broad existing customer base. It also provided a beachhead in Europe. This acquisition followed an alliance where they worked together on the Sydney State Transit Authority fare collection project in 1991. However, the acquisitions the Group has made to date have been relatively small and most of their growth has been organic and through alliances. ERG's investment in R&D has been significant, running as high as 23% of revenue. By dollar spend ERG has ranked in the Top 10 in Australia for the past three years. That statistic is more of a criticism of Australian industry than it is praise for ERG. In their 1991 business plan they committed to allocate 8-15% of revenue to R&D. That level has been maintained as a minimum for the last ten years. Their major investment in R&D has been the development of the Company's multi-application smart card processing technology, which is only just beginning to provide returns. ERG's commitment to R&D was reinforced when they carefully studied successful global companies, particularly in the technology field. Companies such as Nokia invested 15% or more in R&D. Nokia also took a significant risk when it committed all its investment to GSM technology. However, the vision for the technology, the quality of Nokia's products and its innovative marketing strategy saw the company become the global leader in wireless technology in a ten-year timeframe. If you look at the innovative Australian companies that have succeeded globally, there is a consistently high level of investment in R&D. This is an essential factor in our penny stocks selection criteria. ERG remains committed to spending 8% of revenue or more on R&D as it shows strong returns, maintains their lead over our competitors and ensures that they maintain the skills base they’ve developed. A successful global enterprise must have a strong global customer base. The role of ERG’s customers has been critical to their development. Regrettably with some contracts the pressures of project management and timeframes have tested the relationship to the limit. Rather than operate as a partnership the customer-supplier model took over and they became confrontational rather than cooperative with each other. However, in the majority of cases they’ve established strong relationships with their customers. Their first major contract was in Sydney in 1991 and that customer and its site became one of their strongest references. In 1993/94 they won major contracts in Melbourne and Hong Kong. In both cases the projects were introducing totally new technology and were extremely complex. Hong Kong became their most important reference site and still is to this day. The have won considerable extra business as a result, and the customer has showcased the system to the world. Their customer became their partner and the Hong Kong System has been more effective for them than any of their own sales force. Prospective customers and consultants from around the world visit the site and then adopt it as the model for their own systems. A major reference site, or customer of international recognition, is fundamental to an Australian company being accepted and achieving global status. ERG now has 350 customers in approximately 200 cities (33 countries) around the world. Ongoing management and support of the customer base is challenging and their new knowledge management system incorporates their customers as part of the Group for communication purposes. The team of committed, enterprising and frequently traveled people at ERG has demonstrated that a global enterprise at the forefront of its industry can be built and managed from Australia. A commitment to innovation and self-belief has been fundamental to that achievement, as has unflinching focus. In 1993 some people in Australia thought their vision was unrealistic or unattainable. At times they have been called underachievers. They had to weather a storm in Melbourne for 3-4 years, which was highly publicized (and adverse to ERG). They stuck to their belief in their vision and themselves. When many wanted to write them off they bounced back with a flurry of new contracts and alliances. They are now better positioned than they have ever been. Their vision and commitment have always been long-term. ERG has created significant employment in this country and abroad. It has also generated wealth for its employees and shareholders and has helped to raise awareness around the world of the talent, which can be found in Australia. We believe ERG has also provided its customers with better business solutions. ERG has trained subcontractor organizations in quality and management and helped make them better organizations, which can hopefully grow as they have. They have fast tracked their own knowledge and capability through alliances with some great international companies. The Company has built a good relationship with AusIndustry and the Department of Industry, Science and Resources, which have supported them where possible. ERG has not completed its journey. The Company has made it to the global stage, but must now go on and deliver long-term, sustainable earnings and continue to keep ahead of its competitors through innovation and reinvention. Their continuous striving to be better is the root of innovation This description of the backbone of ERG highlights the fundamental reason why this company has and will continue to succeed in a competitive marketplace. Although this long-winded run down of ERG may seem to have little to do with investing in the company, it has everything to do with it. They don’t settle for second best. They know how to make their vision of the future come to pass, and this is the kind of stock you want your money on. The current share price of A$0.23 is undervalued greatly because investors have become extraordinarily greedy in expecting ERG to come up with very large contracts. When they don’t see their cravings fulfilled they sell it down in a whim. We expect to see ERG’s price increase at least 300% within the next 2 years. This is the opportune time to jump in and accumulate more shares. In America this investor attitude vs. the business attitude is not so different, but you need to understand to make money comes from being patient when you are on a good thing. We only provide you with outstanding penny stocks that have passed a rigorous selection process, and that means profits to you. A definite BUY as it’s been greatly oversold. As contracts are won it is important to remember they take approximately 11/2 to 2 years before profits are forthcoming. Now that the share price has reached a bottom it is time to accumulate shares and hold. 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| Re: AES Prodata | 100% owned subsidiary of ERG Limited Belgium | 06:40:03 02/01/03 Sat |
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